Importance Of Estate Tax

MEMORANDUM

To: Alex Lee

From:

RE: ESTATE TAX AND STRATEGIES ON HOW TO MINIMISE IT

Estate tax is imposed when the taxable estate of a deceased person is transferred through a will or according to state of laws of intestacy if the deceased died without leaving a valid will. For the tax to apply on an estate, the person must have died during a period when the federal estate tax is in effect.

Various factors determine the amount of estate tax charged on any certain estate. One of the most important factors is how and when the transfer of property is done. The formula for calculation of taxable estate and the estate tax may be summarized as follows; FEDERAL ESTATE TAX FORMULA AMOUNTS Gross Estate XXX

Less; Expenses incurred in settling Estate (X)

Actual transfer of control over property; the donor must give up all control on the property otherwise it won’t be considered a gift.

5. Acceptance of the gift; The done must acknowledge and accept the gift from the donor.

Unlike most other tax structures, the Federal Estate Tax and Gift Tax are related and unified into one tax system. This is because they both entail transfer of property for no consideration, and if a transfer doesn’t fall into a gift it is more likely to fall under the estate. The Gift Tax applies to any transfers made during one’s life; on the other hand the estate tax will be applied to the transfers made at death either through a will or in accordance with the intestacy laws.

It is important to take note of ways in which you can reduce the tax on your estate and hence increase the value of property transferred to your inheritors. The following are strategies you could apply during your life in order to minimize estate tax:

1. Generation skipping: This refers to the transfer of property to third generation instead of directly to your children i.e. to grandchildren. This arrangement will save the asset from double estate taxation and hence increase the value of the assets transferred. If the transfer is made directly to your child then, the transfer from you to your child will attract an estate tax and then your child shall transfer the same property to his children and therefore a tax will arise through the second transfer from your children to you grandchildren.

This means you may transfer $154,000(14,000X11) per annum without incurring any taxes. You must however gift each individual separately in so that this exclusion applies. Gifts are a way of reducing the estate tax if the annual exclusion is exploited diligently.

In addition to the annual exclusion amount, you are also entitled to a lifetime gift tax exemption. The value for lifetime gift tax exemption is $5,430,000 for year 2015. Since you have not given any gifts in the past, your lifetime gift tax exemption is still available for use. Any amount beyond the annual exclusion reduces your lifetime gift tax exemption and will be tax free as long as it does not exceed your lifetime gift tax exemption.

I would therefore advice you to give your son Jackson the money he needs to start the business because it will be an investment to business and will attract the annual exclusion of $14,000 as well as assist you use your lifetime gift tax exemption.

Yours